Price-to-Book (P/B) Ratio

Valuation Metric Investment Wiki — Fundamentals
The Price-to-Book (P/B) Ratio compares a company's current market capitalization to its book value (its total assets minus total liabilities). It is an old-school value investing metric designed to determine if you are paying too much for what the company would theoretically be worth if it were liquidated and all its debts paid off today.
Quick Reference
Type Valuation Metric
Formula Market Price per Share ÷ Book Value per Share
Value Territory < 1.0 (Trading below book value)
Premium Territory > 3.0
Best Used For Banks, financial firms, and asset-heavy industries

1.0 The Formula

Basic Form

formulaP/B = Market Price per Share / Book Value per Share

Book Value = Total Assets - Total Liabilities

The Book Value is essentially the net asset value of a company. If a company sold off all its factories, inventory, and cash to pay off every single debt it owed, the Book Value is what would be left over for shareholders. P/B asks how much a stock market investor must pay to "buy" $1 of that net asset value.

Worked Example

Company Price per Share Book Value per Share P/B Ratio
Company A (Bank) $50.00 $50.00 1.0x
Company B (Steel) $20.00 $30.00 0.66x
Company C (Software) $150.00 $15.00 10.0x

Company B is trading below its book value (P/B of 0.66). Theoretically, you are buying the company for less than its component parts are worth. Company C trades at 10x its book value, because its real value lies in software code and brand power, which do not show up accurately on the balance sheet.

Traditional value investors (like Benjamin Graham) hunted obsessively for stocks trading at a P/B under 1.0, viewing the book value as a hard floor for the stock price.

2.0 Interpretation & Edge Cases

Benchmarks

A "good" P/B ratio depends entirely on the industry. It is most effectively used on balance sheet-heavy financial institutions.

  • P/B < 1.0: The company is either severely undervalued or it is a "value trap" with toxic, overstated assets on its balance sheet that are about to be written down.
  • P/B ~ 1.0 - 2.0: Normal range for banks and capital-intensive traditional businesses.
  • P/B > 5.0+: Common in tech, consulting, and service industries where capital assets aren't required to generate massive cash flows.

When it Fails (Pitfalls)

The P/B ratio is nearly useless for modern technology companies. A company like Microsoft or Google derives its immense value from intellectual property, patents, algorithms, and brand loyalty. The accounting rules dictating "Book Value" do not adequately capture these intangible assets. Consequently, applying P/B to a software stock will make it look monstrously overvalued, missing the entire point.

Beware of intangible assets like "Goodwill" inflating the Book Value. Many analysts use Price-to-Tangible Book Value (PTBV) instead, which strips out goodwill and patents to look purely at hard assets.

3.0 Related Pages

Return on Equity (ROE)

Links directly. P/B dictates the premium you pay, but ROE dictates the return generated on that book value.

P/E Ratio

While P/B uses the balance sheet for valuation, P/E uses the income statement.

Debt-to-Equity Ratio

Uses the exact same book value (Equity) denominator, helping highlight financial leverage.